Team Project Essays Example

Adding alpha returns of all active investors while ignoring transaction costs such as fees and expenses does not guarantee positive returns. For active investors to realize positive returns, the market must be favorable as well as satisfy several factors. First, active investors should carefully select investment opportunities that lie above the market line. The market line provides a benchmark for evaluating the performance of an investment (Foster, 2010). The probability of getting positive returns also depends on chance. Therefore, an active investor may project that a particular investment will deliver positive returns but, selection strategies fail to deliver the intended results. Sometimes active investors may be misled by firms to invest in their companies through promises of financial success. Since active investors are risk takers, they risk their investment hoping for positive results but face disappointment.
The probability of getting positive results also depends on the type of asset. Some risky assets may result in delivering inconsistent results hence leading to the generation of negative results. Some hidden factors can also affect the results of active investors. For instance, inflation can affect the returns of active investors since inflation is always adjusting and hence affect the projection returns of the active investors. While sometimes it may adjust to favor an active investor, inflation can increase to affect the returns of investors.
According to the equation that generates alpha returns, riskless interest rate, market return for bearing risk and return risky asset are the only variables determining the direction of the alpha return (Foster, 2010).This equation fails to cater for other hidden factors that may affect returns for instance, natural calamities such as floods or earthquakes can affect the stock market. Changes in the stock market may affect the returns, even though; the other three equation variables may behave accurately as the investors’ projections. Based on these insights it is rational to state that the returns of active investors do not always take a uniform pattern either positive or negative. Market variables, as well as performance of the investment, determine whether an active investor will get positive or negative returns.
The average returns of active investors are always less than those of passive investors. The argument behind this phenomenon lies with the risky nature of active investors and, the diversification strategy adopted by passive investors. As studies suggest, investors who opt for a diversification strategy spread their risk of investment and hence enhance they stand a better chance of improving their average returns (Ferri, 2011). Although riskier investment yield higher returns, their rate of negative returns is also high. Active investors’ returns thus cancel the high yields of losses, though the average returns are less than those of the passive investor.
Passive investors may not yield high returns as active investors but, they are assured of getting at least average returns on their investment since they invest in long-term ventures that have high odds of generating returns (Ferri, 2011). Passive investors’ idea of focusing on reducing costs and investment risk puts them in a secure position where they are assured of average returns on their investment. Passive Investors are also cautious about their investment and hence, they always seek assurances from their business partners before investing. Therefore, irrespective of high yields an active investor may generate during a particular period, their average returns are always less than passive investors. However, the choice of going for riskier or lesser risky ventures depends on the investor.

References

Ferri, R. A. (2011). The power of passive investing: More wealth with less work. Hoboken, NJ: Wiley.
Foster, M. G. (2010). person capital management. Foster School of Business.